Fitch Affirms Constellation Brands, Inc.'s Ratings at 'BB+'

April 30, 2014 10:31 AM Eastern Daylight Time

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed all the ratings for Constellation Brands Inc.
(Constellations) at 'BB+'. Constellation had approximately $7.0 billion
of debt at Feb. 28, 2014. The Rating Outlook is Stable.

Fitch affirms the following ratings:

Constellation Brands, Inc. (Parent)

--Long-term Issuer Default Rating (IDR) at 'BB+';

--Senior unsecured notes at 'BB+';

--$850 million senior secured Revolver Facility at 'BB+';

--$496 million senior secured Term Loan A at 'BB+';

--$245 million senior secured Term Loan A-1 at 'BB+';

--$650 million senior secured Term Loan A-2 at 'BB+.

CIH International S.a.r.l. (Wholly Owned Subsidiary)

--Long-term IDR at 'BB+'.

--$481 million European senior secured Term Loan A at 'BB+';

--$993 million European senior secured Term Loan B at 'BB+'.

The ratings affirmation recognizes Constellation's strong position in
the premium beer, wine and spirits business that supports its sizable
and stable cash generation. Fitch expects Constellation Brands will
produce increasing levels of cash from operations driven principally by
expectations for favorable industry demand trends, further leverage on
new product development, and the potential for increased efficiencies
through cost synergies.

Leverage, while improved from the close of the Modelo acquisition,
remains outside of current expectations for the 'BB+' rating category.
Constellation should continue to delever as expected to the lower end of
the 4x range by fiscal 2015. Fitch also acknowledges on-going execution
risk with the brewery expansion given the considerable size and scope of
the project. However, overall these risks should be manageable. Fitch
believes Constellation may need to support its operations with increased
capital investment if current above market growth rates continue which
could temper longer-term free cash flow prospects.

KEY RATING DRIVERS

Market Position and Diversification

Constellation is one of the foremost leading producers of premium wine
and spirits. The company sold approximately 67 million cases during
fiscal year 2014 with leading market share positions in the U.S., Canada
and New Zealand. Constellation markets multiple wine brands across all
categories and at several price points. Its well-known wine brands
include; Robert Mondavi Brands, Clos du Bois, Estancia, Black Box, Arbor
Mist, Blackstone, Rex Goliath, Simi, Toasted Head, Mark West,
Ravenswood, Franciscan Estate, Ruffino, Wild Horse, Kim Crawford, Mount
Veeder, Nobilo, Inniskillin and Jackson-Triggs. Premium spirit brands in
its portfolio include SVEDKA Vodka, and Black Velvet Canadian Whisky all
of which, according to the company, have a leading position in their
respective categories. In the U.S, Constellation sells 14 of the
top-selling 100 table wine brands.

Constellation has a perpetual, exclusive license to import, market and
sell primarily Grupo Modelo's Mexican beer portfolio in the 50 states of
the U.S., the District of Columbia and Guam. According to the company,
Constellation's is the largest imported beer company in the U.S. and the
third largest beer company overall with a beer portfolio that contains 5
of the top 15 imported beers. Corona Extra is the best-selling imported
beer at 102 million cases, significantly higher than the nearest import
competitor, Heineken. Corona Light is the leading imported light beer
with almost 14 million cases sold.

The Modelo acquisition also substantially increased the diversification
of Constellation revenues and cash flows. Constellation generated 49% of
revenues and 56% of segment operating income from the beer business
since the acquisition closed. Constellation should benefit from the
current marketing momentum in the Crown portfolio, the expected
favorable growth of imported beer sales in the U.S., and the strength of
the Corona brand. As such, Fitch anticipates the beer segment mix to
grow during the next several years as Constellation increases earnings
and cash flow over the longer term.

Liquidity

Constellation's liquidity was approximately $900 million as of Feb. 28,
2014. The company had a cash position of $64 million and approximately
$836 million of availability under its $850 million revolving five-year
secured credit facility that matures in 2018. Constellation's accounts
receivable securitization facility provides additional borrowing
capacity from $190 million up to $290 million. Constellation had $19
million drawn on the facility at the end of the fiscal year 2014.

FCF in FY2014 was $603 million primarily as a result of the strong
performance from the beer business. This was at the high end of Fitch's
initial expectations for FCF of $500 million - $600 million during the
first couple of years following transaction close. Constellation's FCF
expectations for fiscal 2015 of $425 million - $500 million are below
expectations due to the substantially expanded cost and scope of the
Nava, Mexico brewery expansion. The total expansion investment spending
is now estimated in the $900 million to $1.1 billion range compared to
initial estimates of $500 million for capital over a three year period.
FCF in FY2017 is expected to increase materially as the peak spending
from the brewery expansion declines.

Upcoming substantial debt maturities in fiscal 2015 include $500 million
of 8.375% notes due in December 2014 and $700 million of 7.25% notes in
fiscal year 2017. Annual amortization requirements for the next three
fiscal years are approximately $73 million in FY 2015, $139 million in
FY 2016 and $182 million in FY 2017.

Credit Measures

Fitch estimates that on a pro forma basis, total debt-to-EBITDA for
FY2014 was approximately 4.3x - 4.4x. The post-closing adjustment of
approximately $558 million due in June 2014 and the high capital
investment required for the brewery expansion limits any meaningful debt
reduction during fiscal 2015. Consequently, cash flow growth is expected
to drive further leverage improvement to the low 4x range, which was
within Fitch's previous expectations for the end of FY2015. Fitch also
expects FFO fixed charge coverage to improve to the 3.5x - 3.6x range by
the end of FY2015. FFO fixed charge coverage was 2.9x at the end of
FY2014 without consideration of a pro forma adjustment.

Covenants

Constellation has material flexibility under its financial covenants for
the credit facility. The maximum total leverage covenant is 5.75x until
the first anniversary from the closing, then steps down to 5.50x
thereafter. The minimum interest coverage covenant is 2.50x. Minimal
restrictions exist for the issuance of incremental debt, and restricted
payments are generally allowed if leverage as defined by the facility is
equal to or less than 4.5x. Mandatory prepayments include amortization
payments on the term loans and proceeds from material assets sales
unless reinvested within a pre-specified time period.

Recent Operating Performance

During FY2014, Constellation generated $4.9 billion of net sales that
included $2 billion of incremental net sales related to the beer
business acquisition. The beer segment net sales increased almost 10%
while the wine and spirits net sales increased 2% on an organic constant
currency basis. Organic shipment volumes increased 4.3% for the fourth
quarter to 16.8 million cases and 3.6% for the fiscal year 2014 to 66.5
million cases. Beer shipment volume grew 9.9% for the fourth quarter to
37.7 million cases and 6.9% for the fiscal year 2014 to 182.4 million
cases. Constellation's brand building efforts and innovation across its
beer, wine and spirits portfolio allowed the company to take share and
grow at above market rates. The company expects sales growth in the mid
to high single digit range for the beer business and sales growth in the
low to mid-single digit range for the wine and spirits category.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a
positive rating action include:

--Given the current increase in leverage as a result of the acquisition,
an upgrade of Constellation's ratings is not anticipated over the rating
horizon. STZ's track record of deleveraging following acquisitions and
current commitment to reducing leverage back below 4.0x by early fiscal
2016 was a key rating factor at the time the acquisition closed. While
STZ is currently focused on reducing leverage, growing organically and
streamlining operations, future bolt-on acquisitions are possible given
the interest to improve the overall brand portfolio and efficiencies in
its operations.

Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:

--Expectations that Constellation will sustain leverage above 4.5x
following a material debt-financed acquisition.

--Management allocating FCF for other strategic equity-friendly
initiatives before reducing leverage back to the low 4x range, which is
more in line with expectations for the 'BB+' rating category.

--Sustained FFO fixed charge coverage of less than 3.5x.

--Significant and ongoing deterioration in profitability that adversely
affects operating results due to competitive activity.

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